Tuesday, 8 May 2012

Maybe It's Time For Greece To Leave The Euro

From a hard-nosed economic point of view it makes absolutely no sense for Greece to leave the Euro and revert to the drachma. The disastrous consequences of such a move would go far beyond what some economists blithely characterize as ‘collateral damage.’ And yet, according to the election results, this is precisely where Greece is headed.

Voters say they are sick and tired of being bossed around by Germans and the Troika (European Commission, IMF, and European Central Bank) that have imposed severe structural reforms in an effort to fix the Greek economy and administrative structure. Voters say they want to tear up the agreement that transfers billions of Euros to Greece in return for the difficult reforms that so far have taken a great deal of money out of their pockets through reduced pensions and salaries. And most shocking of all, those nasty people at the Troika even want the Greeks to work harder and start paying taxes. The irresistible force of Greek unwillingness to change will soon meet the immovable northern European object of unwillingness to continue shovelling money to their wayward Greek cousins. One clear outcome of this clash is a Greek default and departure from the straitjacket of the Euro.

As much as I believe a return to the drachma would create even more hardship it may be the only way out of this mess. Efforts to impose a solution from the outside are doomed to fail. At this point any external solution, no matter how economically sound and well meaning, will be still born. A Greek government may be bludgeoned into signing a draconian reform package, but that package will have no credibility and will be rejected in one way or another by the people. Within a matter of months, if not earlier, Greek bureaucrats under enormous domestic pressure, will have bent and amended the agreement completely out of shape.

Let The Greek People Work Out Their Own Solution

Rather than waste time on more acrimonious debate would it not be better to stand back and let the Greeks experience the consequences of default, sky high inflation, and collapse of the banking system that would accompany a return to the drachma? Let the Greek people themselves devise a solution. The EU could then concentrate on reinforcing the firewall to make sure the Greek contagion does not spread. With much of the external Greek debt already written off the impact of a Greek default and departure from the Euro would be less dangerous than a year ago. Also after other weak countries see the post-Euro condition of Greece they may just redouble their efforts to stay in the single currency. The alternative of pouring even more billions of Euros into Greece in return for reforms is doomed to fail. The bitterness felt by the Greeks toward Germany and the Troika spills out even in casual conversation and makes it very difficult to implement any changes.

“We’re Greeks, not Germans.” “The sun shines here. We can’t work as much as the northerners.” “The Germans owe us money from World War II. We don’t owe them a penny.”
“The European Union bureaucrats are as guilty as we are. If our numbers were so crooked why did they let us into the Euro in the first place? Were they sleeping?”

All such comments miss the point that no one forced the Greek state to borrow so much money. No one forced consumers to borrow recklessly. No one forced Greek officials to siphon off so much money in corruption. No external force imposed the self-interested restrictive economic regulations that do so much to stifle growth. Removing those restrictions would not cost a dime, and would do much to stimulate the sustainable growth everyone says they want. But resistance to such a move is great.

Such points may be perfectly valid, but given the current level of popular anger, they are, unfortunately, completely irrelevant. It is time to face this reality and stop kidding ourselves. No package devised in Brussels or Berlin has a hope in hell of being accepted by the Greek people. It is time for Greece to bid adieu to the Euro and find its own equilibrium. Make no mistake. This will be extremely difficult and painful. But there is a chance that after going through this struggle Greece may just find a solution acceptable to most of its people.

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